Final Exam Reviews

CAPM with Beta = 2 Interpretation

100% more volatile than market

3 Truths & 1 False of Official statements

• not required by Securities Act ‘33

• need to be delivered to all buyers of new muni issues

• requested by underwriters to complete disclosure requirements

required to be prepared by MSRB for all new issue muni bonds is FALSE; because MSRB do not issue muni bonds and have no authority over muni issuers

If an unsolicited FAX is sent to a potential client, what info is needed?

idenity of sender, time/place/address of sender, phone # of sender

Interest income earned on which municipal bonds would be included in the AMT computation?

Industrial Revenue Bond, Privates, Redevelopments

Not included in AMT computations

Public purpose bonds (school district, GO bonds- state/local)

Nominal interest rate on a TIPS approximates the

real interest rate

Security that gives holder an undivided interest in a pool of mortgages

pass through certificate

Corporate bond where issuer has to pay interest only if the company meets a specified earning test?

income bond / adjustment bond

If a technical analyst see stock prices drop repeatedly to a certain level, from which they start rising again. Then a market:

“bottom” formed and stock prices will expect to rise over the long term

bottom = bullish since market bottomed out and is now moving back upwards

lagging indicators

reported corp profits, employment duration, inventory, labor costs

leading indicators

money supply level, stock prices, build permits, unemployment claims, new consumer goods

coincident indicators

personal income, industrial productions, employment level, gdp

Interest rate in the economy from lowest to highest

fed fund, discount, broker loan, prime

Suitable investments for IRA

zero coupon (high rate of return due to accretion), US gov (higher return), corp bonds (higher return)

municipal bonds are not suited

• bring lower rate of return

a client with…$2,000,000 portfolio worth consists of

• 600,000 Energy ETF

• 600,000 Metals ETF

• 600,00 Oil ETF

• 200,000 Short term Treasury securities

Client’s investment objective?

growth, because the ETF's investments are made in commodities and their goal is made for long term capital growth.

Safety of Principal securities (someone is not risky wanting safe)

Investment Grade, Blue Chip

Preservation of capital securities (cant lose principal)

ex: retirees

short term fixed securities ( CD, Money Mkt, Agency Bonds, Treasury)

Income Securities (ppl want $)

long term securities (corp bond/preferred stock)

Growth Securities (risky)

commodities, small cap stocks, penny, BDCs, Hedge, DPPs, large cap, income fund

What income received by a corporate investor is partially excluded from income tax?

dividends from common, dividends from preferred, dividends from convertibles

this is because corporate can exclude 50% of dividends received

a selling put options exercised by holder means

cost basis = “obligation to buy at XP” - Premium received from selling

1099 D Form

Cash Dividends

1099 INT Form

Interest paid and Tax free bonds reported

Bank Acceptance

sold with no prospectus because its exempt (dont pay federal tax)

Acceptable to do when Options Agreement is not returned yet after 15 days

accept orders to close transactions

To speculate on rising interest rate environment, the strategy that would give the largest profit is to:

Buy calls; because you are expecting the market to rise?

Agency Cross

perform OTC when BD receives “buy order” from A customer and a “sell order” from B customer on the same stock and matches the orders

Rule 612 under Reg NMS

disallow sub penny orders to be entered

ex: 15.20 bid - 15.40 ask and customer wants 15.211 is dissallowed

Marginable securities

exchanged listed, debenture, OTC, investment grade

Non marginable securities

penny, new issues less than 30 days, mutual funds

Euro Dollar Bonds truths and 1 false

US issuers of euro bonds are not subject to foreign currency risk, non US issuers of Euro bonds are subject to foreign currency risk, euro dollar bonds are denominated is US currency only

False: eurodollar bonds issues are sold all over world including USA

• false because it is only sold in Europe but pay in USD and not registered meaning it cannot sell in US

ETN risk

credit risk

T/F: Company manager can cast vote for non attendees

true

What doesn’t happen & happens to a customers account upon death?

doens’t happen: all positions liquidated

happen: frozen account, open orders cancelled, POA cancelled

Tax Equivalent yield

Formula: coupon / (1-tax)

Def: what the yield on a corp bond would need to be to be equivalent to the yield of a muni bond

How should controlled relationships be disclosed?

verbally with client before purchase and written disclosure

Bond Anticipate Note

capital projects, long term

issuing a BAN will fund the capital project before completeing the project and they will pay back Gov with $ from project proceeds

TRACE

accommodates reporting transactions in debt securities

why would investor buy long straddle

unsure if stock go up or down

expects volatility

why would investor buy short straddle

want stability

believe stock will stay FLAT

what is not allowed in Arbitration Cases?

no appeals given

Joint account Truths and 1 False

Truths

• checks must issue to all parties

• either party can place trade

• checks can be authorized to be dispersed by either party

  • transfer needs all party signatures

False: issued certificates from an account can be endorsed by either party for deposit

duration measures

level of bond’s sensitivity to interest rate risk

days of financial exploited adult

15 days initially , 10 days for internal review, 30+ days if state/court needs to investigate further

adjustable rate preferred stock

get bigger dividend depending on some benchmark outside of that company

fund with Stocks and bonds

balanced fund

IRS section 1035

trading insurance policy for another

T/F: rep cannot share commission, sales charge, or referral fee with anyone other than registered person at the same firm

true

Normal priority for filling municipal orders

pre sale, group, designated, member

Official Notice of Sale

published when municipality solicits bids from interested person for a new bond issue

minimum equity for an individual customer to open a portfolio margin account

100,000

minimum equity requirement for regular margin account

2000

Variable > Assume Interest Rate (AIR)

increase annuity payment

Variable < AIR

decrease annuity payment

Between general and limited, who or whom is required to sign account application

general only

Options Agreement signed back for how many days

15 days

97 ¼ bid . what is the dealers spread? how much? basis point?

100 - ¼ = .75 spread

.75 = $7.50

75 basis points

Extraordinary call will be made due to what reasons

proceeds of the issue were never expended to build the facility

homeowners have prepaid their mortgage at faster rate

facility built with the proceeds of the issue has been destroyed by fire

extraordinary mandatory call

made when calamity occur

saucer(s)

saucer - reverse downward

inverted - reverse upward

blind pool

limited partnership where investments are not known at the time of the partnership is formed

sales literature

password protected website

fudiciary accounts

trust, custodial, executor of estate

order types

fill or kill - all or ancel

immediate or cancel - partial execution

all or none - sit indefinitely

GTC - only valid until present time

Street VS Desginated

Street - name of BD

Designated - name of Owner and dividends/interest payments are received from issuer or transfer agent

When is a exchange listed security routed to ECN rather than exchange floor?

if ECN price offer is better

beta less than 1

public utility

Investor that will buy BDC

high net worth investor seeking dividends

DVP/RVP account

delivery vs payment account

number of rights formula

= outstand shares / number of shares in rights offering

Interest coverage ratio

= EBIT / Interest Expense

calamity call covenant

a promise by a municipality to call a bond issue’s underlying collateral is destroyed by a natural disaster

variable rate municipal note dont have what risk

interest rate risk

EMMA

where underwriters submit official statements and relevant documents to

Options Sales Literature

shows performance must be accompanied or preceded by the latest Options Disclosure Document

In order to open a new account for a customer that wish to buy IPOs, the:

customer must sign representation letter

Records of speaking engagements retention

3 yrs

How should spouses handle inherited IRAs

either roll over into new IRA

or

roll over into existing IRA for beneficiary

How should non spouses roll over inherited IRAs

roll account into inherited account and deplete it over next 10 yrs

take proceeds immediately

elect to get proceeds and liquidate account in 10 yrs

Non qualified variable annuity

investments in separate acct grow tax deferred

Annuity unit

accounting measure upon which the amount of pay out is determined

equity in SMA margin account formula

LMV - Debit = Equity

LMV = total of all shares times their price

to open partnership account, SSN or TAX ID is needed from

the partnership

buying index puts against listed securities in a portfolio is what strategy

hedge strategy

covered call writing is a strategy used when the market is

stable

why is covered calls used

generate additional income

Mutual Fund VS ETF

mutual fund distribute capital gains/dividends to shareholders annually and capital gain taxation happens when shares are sold

% to be regulated under Subchapter M

90

commercial paper

270 days

unsecured promissory note

mature on pre set date and set price

repurchase agreements

2 gov dealer A will sell securities to Dealer B and A will buy it back later

the interest charged in the agreement is the “repro rate” paid by seller to buyer

CMO tranches

floating tranche - no interest rate risk

because the interest rate varies and parallel to the index movement and stay close to par

Security trades that settle in Fed Funds are

US gov, US agency, GNMA

YTC Formula

net annual return / Average Value

Cyclical stocks

stocks that are not needed as often when there is an economic downturn

or

sensitive to shifts in the economy, financial conditions and consumer attitudes

ex: home builder, automobile manufacture, home appliance manufacture

not cyclical: paper towel maufacture

alpha

alpha = actual return - expected return

A > 0 perform better than expected return

A < 0 perform worse than expected return

Alpha used to measure Mutual Fund performance and is impacted by company/industry changes

Keynesian Theory

supply side theory

key - increase gov spending

supply - reduce tax rate

T/F: IRS allow taxpayer to specify which shares are being sold

true

T/F: if there is no specific identification is not used, FIFO method is used

true

Discount corporate and government bonds must or may be accreted over bond life

Must be accreted

durable vs non durable POA

durable - survive incapacitated, can control acct, power dies with grantor death

non durable - power ceases with death and incompetent grantor